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Observations regarding the January 2019 Employment Situation

Posted February 4th, 2019

By Steven R. Drexel, President and CEO of Cornerstone Staffing Solutions, Inc.

On Friday February 1, the Bureau of Labor Statistics (“BLS”) released its monthly summary of labor market activity covering January 2019. This was the second month in a row in which a remarkably strong employment report exceeded expectations and calmed the nerves of an anxious public. January’s report was encouraging with much better than expected 304,000 net new jobs and the best earnings growth of the current expansion. This is a reassuring result given that economic anxiety had been elevated due to slowing global growth particularly in China and Europe, waning consumer confidence, trade tension with China, and the legislative tensions. The Employment Report’s confirmation of accelerating job and earnings growth suggests that the labor market remains strong and consumer spending should support continued economic expansion.

Jobs Growth At-a-Glance

The highly anticipated jobs growth figure at 304,000 net new positions was much stronger than the 170,000 consensus expectation as well as December’s downwardly revised 222,000 increase. This was the unprecedented 100th month of sequential job growth stretching all the way back to 2009. The industry data was also reassuring in that the share of the 258 detailed industries that improved during January was 61 percent indicating fairly broad-based improvement. Additionally, the average workweek remained solid at 34.5 hours. Analysts had feared that the temporary government shutdown, which occurred during January, might have had some spillover effect as private contractors may have been furloughed, but no such effect was evident. The 300,000 sidelined federal government workers were eligible for back pay and therefore the establishment survey counted them as employed during month. The weather was favorable during January which had a positive effect as illustrated by the 52,000 increase in construction jobs, nearly double the average rate of growth for this sector. Some observers will note that December’s job growth increase was revised downward from 312,000 to 222,000 as a part of this report. This was a large revision going in an adverse direction. It is true that January’s oversized increase could be revised down as well. Revisions notwithstanding, if the initial job growth number is above 300,ooo , even a large revision leaves a respectable job growth number as was the case during December.

Unemployment Rate Update

The unemployment rate increased by one tenth of a point to 4.0 percent. Here there was an impact from the temporary federal government shutdown given that for the household survey, furloughed workers are counted as unemployed despite the fact that they are eligible for back pay. Another factor at play this month was an annual technical adjustment known as ‘population controls’ which reconciles the differences between BLS data and Census data developed from separate program surveys. This year the population control adjustment makes it treacherous to compare December’s and January’s results. It is valid to observe that even if January’s 4.0 percent rate is elevated, it is still a historically low level indicating a tight labor market. The BLS tracks six versions of the unemployment rate. The official rate is the U-3 version. The broadest or most inclusive version of the unemployment rate is U-6 which includes all persons marginally attached to the labor force plus those employed part time for economic reasons. U-6 was notable during January because it increased by 5 tenths of a point to 8.1 percent. All versions of the unemployment rate are subject to the population controls adjustment but the notion that the broadest measure had the biggest adjustment suggests that there may be a pool of workers available to sustain jobs growth in the future.

Wage Rate Update

Average hourly earnings improved again during January resulting in an annual growth rate of 3.2 percent. This is the highest rate of the current expansion and the sixth consecutive month in which wage growth has exceeded 3 percent. It is good that wage growth is accelerating – but not at a rate that suggests overheating that could foreshadow a recession. Recently, various measures of inflation have receded somewhat. With wages growing and inflation contracting, real wages or purchasing power improves which is a positive indicator for consumer spending. At this point in a recovery, with a historically low unemployment rate, wage growth would be expected to be 4 percent or higher. This expansion has featured lower productivity growth, demographic changes (an aging workforce) and regional as well as global workforce competition all of which has the effect of suppressing wages.

Measures of Labor Availability

Focusing on the workers between 25 and 54 years old eliminates the influence of the baby boomers that cause the workforce to be on average older, suppressing the aggregate rates of employment and participation. Concentrating on
prime-age workers also corrects for the younger segments of the labor pool who continue in school or career training. The median duration of unemployment provides insight into how easy it is for unemployed workers to re-enter the
workforce. Collectively, these less-followed series can provide insight into the labor force’s ability to continue growing despite the record long-running expansion and historically low headline unemployment rate:

The labor force participation rate for prime-age workers increased by three-tenths of a point to 82.6 percent, this is still below the peak of 83.4 percent at the end of the last expansion during January of 2007;

Seventy-nine point nine (79.9) percent of prime-age workers were employed during January; this followed three months stuck at 79.7 percent. Despite the increase, January’s rate was still below the 80.3 percent peak during the previous expansion – also in January 2007; and

The number of prime aged workers in part time jobs for economic reasons (meaning they would prefer to work full-time) is still 2,130,000 workers or about 49% higher than the low point of the last recovery during August of 2006.

The median duration of unemployment for all aged workers decreased slightly to 8.9 weeks during January. This was still elevated compared to the 7.3-week duration that was the lowest point of the last expansion during June of 2006.

Industry Sector Details

The industry sector metrics remained strong as 70.0 percent of the detailed industries grew during December which was close to the cyclical peak.

Changes in employment by selected industry segments included the following:

Leisure and hospitality (+74.0k) – much better than average for this strong but volatile sector;

Construction (+52k) – another volatile sector, way above average this month;

Information (-4.0k) – this was the only major sector that contracted during January.

Employment Situation Retrospective

In summary, the BLS Employment Situation Report for January was much anticipated due to a high level of economic anxiety and the uncertain effects of the temporary government shutdown. Thankfully the January results were excellent and reassuring. This result indicates that the labor market remains enduringly, and remarkably strong, even accelerating. The unemployment rate is quite low but reassuringly, relatively stable over the past year. Average hourly earnings are showing some real (greater than inflation) growth. Average weekly hours are solid as well. These factors along with labor force/employment participation rates and duration of unemployment statistics indicate that the labor market while strong and enduring, is not overheating and has room to continue to grow.

The Outlook for 2019

The broader economy is not as robust as it seemed during most of last year. The stock market has been capricious (corrections precede recessions … but only about half the time), growth particularly in China and Europe is downshifting, consumer and business confidence has softened, trade and political tensions remain high. However, the American consumer is in good shape, a continuing dose of fiscal stimulus (lower tax rates and increased federal spending) supports sustained growth during 2019, the banking system is healthy and is lending at an increasing pace. U.S. growth will be slower than 2018, and risks are on the downside, but on balance, indications suggest that the expansion should continue through 2019. Over the longer term, labor shortages, trade and political tensions, growing government deficits and uneven income distribution loom as potentially serious policy challenges.

The current expansion has endured now into its tenth year (compared to an average expansion of five or six years). This is our reward for enduring the historically severe, financial crisis-induced 2008 recession as well as the subsequent, current slow-growth recovery and expansion.

Expect jobs growth during 2019 to average around 180,000 positions per month while the unemployment rate trends down to around 3.5 percent by year-end. The near-term risk of recession is creeping up to around 20 percent but remains low given the absence of any critically growing bubbles (imbalances) or an imminent financial shock.

Word on the street

In the world of recruitment, staffing and employment services, there are not yet any signs that demand is declining; it is the availability of workers, or the skills shortage, that restricts growth. Recruitment of passive or employed, but willing to consider a move, workers is the key to success in this environment. The BLS estimates year-over-year staffing employment growth at 2.8 percent, while the American Staffing Association reports 1.5 percent employment growth. Employment growth is slow, but wage and margin improvement as well as more search and placement fees all combine to provide better financial results despite unexciting unit growth. Wage rates, particularly at the margins for in-demand skilled positions, are growing faster than the published aggregated economic reports suggest. Fill ratios are depressed and time-to-fill metrics are elongated, so staffing companies can be more selective in the positions that they choose to fill. Workers, feeling more confident, are increasingly willing to consider a new opportunity if the new position offers an increase in pay or perceived growth or even just a better commute.

Please feel free to contact me if you have any questions or comments.

More about Cornerstone Staffing Solutions

Cornerstone Staffing Solutions is among the largest staffing firms in America and received Inavero’s Best of Staffing® Client Award in 2016, 2017 and 2018. Since 2003, Cornerstone has grown from a neighborhood staffing provider toa national firm that employs thousands of people at hundreds of companies from coast to coast. The Cornerstone family of companies also includes Dallas, Texas-based RightStone (www.rightstone.com), and Chicago, Illinois-based Arlington Resources, Inc. (www.arlingtonresources.com) and Casey Accounting & Finance Resources (www.caseyresources.com). Providing candidate searching and job placement for administrative, industrial, technical, sales and transportation positions, Cornerstone truly is where talent and jobs meet. Visit Cornerstone at: http://www.cornerstone-staffing.com.